The Creation of Imbalances

When is a new imbalance created?

A trendline break creates a new imbalance at the origin of the move and potentially at
the TL intersection.

A new imbalance is created when an opposing imbalance has been eliminated

Consolidation away is mandatory for an impulse to become an imbalance

New imbalances at all-time highs and all-time lows

When is an imbalance considered as broken or eliminated?

How far back should I look for imbalances?

Combining trendline breaks and imbalances in a chain analysis.

Basics concepts on drawing imbalances

When to adjust the proximal line when drawing an imbalance

When is a new imbalance created?

An imbalance is created under these scenarios

We want proof of something so that we can tell if there is an imbalance here or there.

1. The break of a trendline with a full candlestick.

2. An opposing imbalance has been eliminated.
3. All-time highs or all-time lows are eliminated by an impulse strong enough to
consolidate away. More on the concept of consolidating away further on in the course.

All three scenarios can happen at the same time.

A trendline break creates a new imbalance at the origin of the move and potentially at
the TL intersection.

Yes, the break of a trendline with at least a full OCHL candlestick creates a new imbalance at the
origin of the move or at the intersection of the trendline if the basing structure is intersecting
with it.
The same is true demand levels, that is, two peaks broken by at least a full OCHL candle.

Up to two imbalances can be created when the trendline is broken.

1. At the origin of the move

2. At the basing structure, if the structure intersects with the TL. That is, the basing structure
must touch the trendline

The example below should be self-explanatory.

• Two peaks connecting A and B allow us to draw a bearish TL

• Two demand zones are created, the first one right at the intersection of the TL at #1
• The second demand if created at the origin of the move at #2
A new imbalance is created when an opposing imbalance has been eliminated

It's crucial to understand this principle as it is the core rule in this "fight" of imbalances.
Understanding which type of order flow has most recently prevailed can add great probability to
an upcoming turn in price. To do this, we need first to determine where the opposing imbalance
is located.

As always, an image is worth a thousand words. An example will help clarify these concepts.
AUD/NZD Forex cross pair daily timeframe is the chart we will be using.

• Demand [1] was eliminated by an impulse at [2] that was strong enough to remove it
and consolidate away with at least one full OCHL candle as will be explained in the next
lesson, the consolidation away lesson.
• We have a valid imbalance at [2], the elimination of demand [1] happened right at [3],
the distal line of daily demand [1].
The same is true not only for any timeframe but also for any asset. New imbalances are created
on Forex currency pairs, Stocks, Futures and any market. Let's take a look at an oil-related stock
company Chevron #CVS.

Consolidation away is mandatory for an impulse to become an imbalance

An imbalance will not be confirmed if price returns to the origin of the move in the very next
candlestick, right after the original impulse has been created.

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The consolidation away concept helps us identify those impulses that are not strong enough to
stay away from the original impulse.

Let's have a look at an Oil and Gas stock company, Phillips 66 #PSX monthly timeframe.

• Last monthly impulse at [2] did not consolidate away with a full OCHL candle; therefore it
cannot be a demand level because demand levels are impulses strong enough to stay
 away from the potential base. What we see at [2] is a picture of balance, and as supply
and demand trades, we want to trade imbalances.
• However, impulse at [1] is a clear imbalance, and the bullish impulse was strong enough
to consolidate away with a few OCHL candles, those within the circle.

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Without the consolidation away, we will be in front of a balanced picture and not an imbalance.
Therefore, we will not have a validated supply or demand zone. Without a validated supply or
demand zone, it cannot be scored for tradeability.
New imbalances at all-time highs and all-time lows

All-time highs and lows scenarios require unique characteristics for an imbalance to be
confirmed. The reason behind these special conditions is that at all-time highs and lows there
are no opposing imbalances to be removed. How can an impulse become an imbalance is there
is no opposite imbalance to be eliminated or an opposite trendline break?

Although you need to learn about scoring to validate an imbalance at an all-time high
and all-time low, we will explain what we need to see to confirm imbalances at all-time
high and low scenarios.

• An impulse twice as wide as the basing structure, or 2:1 . The stronger the
impulse provided by the imbalance, the better.
• The new impulse must consolidate away with at least one
full OHCL candle. As explained in a previous topic, consolidation away is a
mandatory feature every imbalance must have; otherwise, the impulse will be
considered as a balance and not an imbalance.

New supply zones at all-time lows

We will start with a stock this time. We will use Luckin Coffee #LK weekly timeframe.

• All-time lows broken, nothing to the left below $14.00

• A very strong impulse that started at #1 has managed to consolidate away with
several weekly candlesticks at #2.
• Rules state that a new supply imbalance has been created at #1.
New demand zones at all-time highs

Let's have a look at a very well-known American stock as the first example, Netflix
#NFLX. We will use the weekly timeframe.

• All-time highs have been broken. There is nothing on the left to be eliminated.
• Two new impulses were strong enough to consolidate away on the weekly
timeframe at #1 and #2 with at least one full OCHL candle.
• No pullback happened at #2, but Netflix did pullback to the upper imbalance at
#1.
When is an imbalance considered as broken or eliminated?

New imbalances are created every day, every week and every hour depending on which
timeframe you are looking at.

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An imbalance is eliminated if the lowest low or the highest high of the basing structure has been
penetrated through by as little as a tick or a pip.

Let's have a look at 3M #MMM American stock, we will use the monthly timeframe this
time.
• Demand level [1] has been broken. The lowest price at [1] was fully penetrated
and broken by a few ticks at [2], even a few dollars. This demand level is an all-
time high scenario, as explained in the previous lesson.
• A demand level is considered broken if the lowest low of the basing structure has
been traded through by as little as a tick. This example complies with this
definition.
• The imbalance responsible for eliminating demand [1] is located higher at [3]. We
must always look left and above the current price to find supply levels.
How far back should I look for imbalances?

You will probably be asking yourself by now how far back in time should we be looking
for imbalances? The answer depends on the timescale or timeframes you are using.

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Rule of thumb: go as far back as you need to in order to look for imbalances

The timeframes you choose to trade will dictate how far back in time you should be
looking for imbalances since it’s all based on the top timeframe of that sequence. It’s
not the same looking for imbalances using lower timeframes like H1 or 15 minutes
charts than looking for them in monthly and quarterly imbalances. The time value is
important, it's all relative to the timeframes you are using.

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The bigger the timeframe used the further back in time you should go and find older
imbalances. It can be hours, days, weeks, months or even years.

Let's use EUR/NZD monthly timeframe. A monthly timeframe is made of monthly

candlesticks, that is, every single candlestick is one month worth of time. You might
have to wait for months before price retraces to one of those imbalances. On the
monthly chart below, you can see a very strong monthly demand at [1] responsible for
breaking the bearish trendline. It took 18 monthly candles for price to retrace to the
imbalance, unthinkable for a day trader or a scalper. 18 months! But when it did retrace
to the imbalance, look at what happened!
Combining trendline breaks and imbalances in a chain analysis.

You are now in a position to combine trendline breaks and the creation of new
imbalances accomplishing the removal of an opposing imbalance. The process of
combining trendline breaks and imbalances is what we will call from now on "the chain".
 Quote
The chain defines the relationship between the trendline break which connects the last
two impulses and the creation of new imbalances.

Let's use Tesla #TESLA stock weekly chart. See the chart below, trendlines and imbalances
resulting from the break of those trendlines will create new imbalances, and once they are
eliminated, new imbalances will be created. This is an all-time highs scenario. Do not be
overwhelmed by the number of trendlines and imbalances; everything will start to make sense
very soon.

You will need to do hundreds, if not thousands, of chain analyses to master the creation of new
imbalances. There are no shortcuts. Missing a link in the chain will ruin the analysis, potentially
resulting in a wrong trading decision.
Basics concepts on drawing imbalances

Drawing supply and demand zones is a skill that many people fail to master correctly.
There are many different interpretations of how to draw the zones accurately. This is to
be expected since everyone has their method of trading and locating these zones. Most
traders that land at the Set and Forget trading community having been trading multiple
strategies and carry with them different interpretations of support and resistance levels,
supply and demand zones and various ways of reading price action.

The base or the origin of the impulse is what matters the most. The base usually consists
of a continuation pattern made of a few basing candlesticks or a series of particular
candlestick patterns. All imbalances are made of a basing structure,

The basing structure of an imbalance can be identified by drawing two features:

1. The proximal line. The price closest to the current price.

2. The distal line. The price furthest away from the current price.

Let's see a graphical representation using USD/CAD H4 timeframe. The chart below
shows a demand level whose proximal line is located at [A] and distal line at [B]. The
distal line of an imbalance must always include the lowest low in the basing
structure when drawing a demand level and the highest high when drawing a
supply level.
 Quote
Basing structures rarely present themselves as textbook structures. There are as many different
candlestick combinations as there are colours in the light spectrum.
There are hundreds of candlesticks formations, some of them bearing very fancy names but
don't worry. You don't need to learn them all, just a handful of them. We will only focus on a few
candlestick patterns.

There are many different looks and shapes for bases. Their appearance will vary slightly
depending on the market you are trading. There are subtle differences between
candlestick patterns found on the stocks and futures compared to those in Forex, but
the patterns and their names are still the same.

The most common candlestick patterns found at the bases of imbalances are:

• Engulfing patterns (two candlesticks formation). The last candle closes

below/above previous candles open/close.
• Piercing patterns (two candlesticks formation). We could say the piercing
pattern is a failed Engulfing pattern, price fails to close above/below previous
candle's open/close by a few ticks. The bearish piercing pattern is also known as
'dark cloud cover'.
• Basing candles, spinning tops, dojis, morning stars and evening stars. One or
more basing candles at the base.

You will learn how to draw imbalances by reading hundreds of different analysis Make sure you
practice a lot and if you have any questions, don't hesitate to ask. The best way to learn is to
make mistakes and be corrected.

Using engulfing patterns to draw imbalances

We will use the bullish engulfing pattern is taken as an example.

• Locate a basing area where price has created a good imbalance.

• Find a bullish ERC candle that closes above basing bars.
• The bullish candle must close above the previous candle's open/close (candle's body).
• If there are several candles at the base with similar open/closes around the same price
area then the engulf could cover all of them.
• If one of those basing candles is at a different "height", above the previous basing
engulfed candle then skip them and only take into account the ones at the same level.
• The proximal line will be right at the open/close of the first engulfed candle or further
back in time if there is no candle closing above/below the first engulfed candle's range.
• The distal line will be at the lowest low of the engulfing pattern (no matter how many
candles there are on the left).
• The engulfed candle can be either a 50% candle or a non 50% candle.
Using piercing patterns to draw imbalances

These two patterns are similar to the engulfing pattern covered above. The main difference is
that the new candle never closes above/below the previous candle's body. The dark cloud cover
is also a reversal pattern. We could say the piercing pattern is a failed Engulfing pattern, and
price fails to close above/below previous candles open close by a few ticks. Bearish piercing is
also known as 'dark cloud cover.'

• The Piercing Pattern = Dark Cloud Cover

• Piercing pattern = demand reversal pattern
• Dark Cloud Cover = supply reversal pattern
When to adjust the proximal line when drawing an imbalance

There are times when you can be flexible drawing the imbalances, but before you start being
flexible, you must understand and sink in the rules for quite some time, spend a lot of time in
front of the screen and see thousands of scenarios. It's imperative to understand that before you
tweak any rules, you must first master them.

There are some cases when you can adjust the proximal line:

• There is a single candle at the base.

• Several candlesticks whose bases are tight and small.

In both cases, you can draw the proximal line covering the lower shadows (supply) or upper
shadows (demand).

Option 1: proximal line at the lowest open/close of the basing candles.

Option 2: proximal line covering the lower shadows since both bodies and wicks are very tight
and small.